Government Intervention and Chile’s Salmon Story

The "miracle of Chile," as Milton Friedman once called the country's capitalist reorientation, is really the most enduring myth of this postindustrial era.

The country assembled Latin America's most dynamic economy by doing quite a bit more than simply stepping out of the way of the market's invisible hand.

It was the Chilean government that in the mid-1980s, during the tail end of the brutal dictatorship of General Augusto Pinochet, began investing in the research that produced the technology for salmon cultivation for wide-scale commercial use.

When the project became commercially viable, a nonprofit research agency funded by the government, the Chile Foundation, sold its stake to Japanese investors, in 1989.

Today salmon is Chile's second largest export, after copper, bringing annual revenues of more than $1 billion and providing jobs for more than 100,000 people. And, tellingly, it got its start not from government's withdrawal from the marketplace, as neoliberal theory posits, but from government intervention.

Salmon illustrates how this country navigated the ebb and flow of a rerouted global economy better than any in Latin America and perhaps better than any developing country in the world. While neighboring countries soared and crashed and their citizens protested their stumbling economies and dwindling paychecks, Chileans punched the clock, selling more fish, fruit, wine, processed food and metal products abroad than ever before.

No other country in this part of the world has grown more since 1990.

Years before other countries began retooling their economies to suit Washington, Chile was the prototype. It quickly reconfigured its monetary and industrial policies and cut social spending in the days following the violent U.S.-backed coup that toppled the democratically elected government of socialist president Salvador Allende in 1973.

Thing of it is, the reforms failed miserably, producing manic cycles of booms and busts, rising unemployment and widening inequality of the sort that would define the financial transitions of poor countries that began to follow Chile's lead a decade later.

The irony is that just as most of Latin America was beginning to whittle government's role in business affairs, Chile was shifting course, reestablishing the influence of government in industry and trade.

Not only has the Chilean government wielded influence in getting its key exports, from table grapes to goat cheese to sofas to market, but it also has used legislation, regulation and taxes to tame a feral free-market system that turned rabid on the country in the 1970s and 1980s.

Argentina and Brazil loosened restrictions on foreign exchange flowing in and out of their countries. Having already been burned by the fickle cash flow, Chile slapped restrictions on it.

While countries such as Bolivia, Venezuela and Uruguay put the brakes on public spending in the 1990s, Chile more than doubled public expenditures on health and education over the same period.

Other countries have cut taxes since 1990; Chile nearly doubled its taxes on corporations over the same period. While Argentina was watering down its labor laws to lower costs and make it easier for employers to hire and fire workers, Chile was strengthening its labor legislation, doubling its minimum wage and requiring employers to extend jobless benefits to unemployed workers.

Brazil and Argentina fixed the value of their currencies at an artificially high price to combat inflation and spur imports. Chile's central bank, by contrast, devalued its currency and kept its exchange rate on a tight leash, tinkering with it on an almost daily basis to curb inflation — but also to protect local industries from imports that would be made inexpensive by an overvalued peso.

Nearly half of all Brazilian workers did not have a job contract in 2005; for Chile, the figure was one in five. The number of Argentines living in poverty quadrupled between 1989 and 2002; over that same span, Chile reduced by half the ranks of the impoverished.

"What makes Chile different from the rest of Latin America," said Manuel Riesco, an economist with the Center for National Studies of Alternative Development in Santiago, "is not that we embraced the free market more than our neighbors. What we realized is that the free market is like a car.

“There is no doubt that it is the best way to get you from point A to point B. But you have to steer. If you take your hands off the wheel, you will end up face down in a ditch."

Chile's economy is far from perfect. But its fast fall and slow slog back up the hill to solvency provide crucial evidence that there is a middle ground between a Darwinian brand of capitalism and a navel-gazing approach to socialism, and demonstrate that an export-led economy is best achieved by spending more and not less on infrastructure, human capital and technology.

"The myth is that Chile's success is purely the result of fundamentalist free-market policies," said Dani Rodrik, a professor of international economics at Harvard University.

"But the truth is quite a bit messier than that. Government activism and management in Chile did not stifle the power of the free market. It unleashed the power of the free market."

Editor's Note: This feature is adapted from "Flat Broke in the Free Market" by Jon Jeter. Copyright 2009 by Jon Jeter. Reprinted with permission of W.W. Norton & Company, Inc.